Economy in Brief: 2024

Inflation in the United Kingdom, as measured by the CPIH, rose by 0.4% in August as well as for the measure excluding energy, food, alcohol, and tobacco that rose by 0.5%. The recent sequence of monthly inflation rates is not hospitable or kind to the notion of the Bank of England doing any further rate cuts anytime soon.

Sequential inflation readings show the headline CPI measure up 3.1% over 12 months and at a 2.9% annual rate over six months. It further accelerates to a 4% pace over three months. The expanded core excluding energy, food, alcohol, and tobacco is up by 4.4% over 12 months, up at a 5.1% annual rate over six months and continues to rise at a 5% annual rate over three months. Both series are at some point about a tick or so short of being persistently accelerating measures. However, putting technicalities aside, inflation clearly is accelerating in the U.K. and both measures embrace generally accelerating trends. The year-over-year headline pace of 3.1% is too fast; the core rate of 4.4% is way too fast. The three-month growth rates that have the headline at 4% and the expanded core 5% are far too fast.

Applying the diffusion concept to 12-month inflation compared to a year ago, inflation does decelerate on that time horizon with a diffusion value only at 18%. Diffusion above 50% means inflation is accelerating in more places than it is decelerating. Below 50% diffusion flags inflation that is more broadly decelerating. The 12-month reading flags a sharp broad slowing for inflation. Of course, the 12-month headline inflation rate is 3.1% and a year ago it was running at twice that pace of 6.3% so finding general broad deceleration is not too surprising. The next step is a comparison of six-month inflation to 12-month inflation. Here we see diffusion up to 63.6%. So, inflation is accelerating in more categories than it's decelerating over six months compared to 12 months, not a good development. Over three months, however, headline inflation accelerates to 4% while the core is more or less unchanged at around the 5% mark, but diffusion falls back to 36.4% indicating that inflation is only accelerating at about one-third of the categories over three months. So that's a better development.

On a month-to-month basis, diffusions in August and July are both above 50%; but diffusion in June fell a little short of that with a diffusion gauge at 45.5%. Recent months seem to show some inflation pressures on balance.

Germany’s ZEW survey has deteriorated sharply in September. The current index has fallen to -84.5 in September from -77.3 in August. The expectations index fell back to 3.6 from 19.2 in August. It had been as high as 41.8 as recently as July 2024. Conditions and expectations for Germany have taken a sharp turn for the worse over the last few months. The chart shows that expectations are much better than their depths of 2022. Their evolution from there has been erratic, but there has been a clear and strong rebound in expectations from those lows of 2022. However, there's also been significant vacillation and we're currently in a period in which the downdraft in expectations is relatively severe. Current conditions are amid quite different circumstance; they had some rebound from their 2022 lows which were still slightly higher than the 2020 lows that occurred during COVID. However, that rebound was not long lasting; in 2023 the current index had sunk substantially and although there was some minor rebound, we are now seeing current conditions making new lows and some of the lowest readings that we've seen since the brief COVID-caused recession.

The current index has been stronger than its current value 94% of the time, underscoring how extremely weak the current observation is. Expectations have been stronger about two-thirds of the time, a significant metric, but not as draconian as the reading for current conditions. However, in July expectations were strong enough that they had been weaker only about one quarter of the time. Both expectations and current conditions have taken a severe turn for the worse.

The European Monetary Union trade surplus moved lower in July. At €15.46 billion, it is down from €17.02 billion in June. The erosion was due to a larger deficit on nonmanufacturing trade as the manufacturing balance actually improved to €39.1 billion from €37.9 billion. However, on nonmanufacturing trade, the deficit swung to -€23.7 billion from -€20.9 billion.

The chart provides the hint that the move back to surplus may have passed its peak as there is a string of surpluses having swept up to higher levels and now engaged in the process of headed for lower levels.

The trend for exports shows overall exports slowing then declining steadily from a growth rate of 2.5% over 12 months to 0.6% over six months to -8.1% over three months. This transition is driven by the growth rates of manufacturing as well as nonmanufacturing exports; both of which transition from positive growth rates over 12 months to negative growth rates over three months.

On the import side, the patterns are inconsistent although they culminate in weakness over three months. Total imports fall 2.5% year-over-year, advance at an 11.4% annual rate over six months, and then decline at a 3.2% annual rate over three months. Manufacturing imports follow this same progression; however, for nonmanufacturers, growth is at 3.2% over 12 months, that expands to a 15% annual rate over six months, and then collapses to -3.4% over three months. Import trends are chaotic.

Turning to three European countries two of them the largest countries in the European Monetary Union, we find Germany has exports declining progressively and imports doing the same. Both German export and import flows are slowing consistently and declining with imports falling faster than exports. For France, exports are accelerating from 4.3% over 12 months to 5.3% at an annual rate over six months to nearly 12% at an annual rate over three months. French imports, in contrast, don't have a clear trend but they are declining on each of those horizons. The U.K. shows declines in exports and imports year-over-year that are relatively balanced and again declines over six months that are relatively balanced for the two flows. But over three months, U.K. exports advance at an 11.3% annual rate while imports are basically unchanged at a 0.1% annual rate.

Export trends for Finland, Portugal, and Belgium find cross trends, with Finland showing a decline in exports of 17.3% at an annual rate over three months. But Portugal shows exports accelerating from 12-months, to six-months, to three-months, culminating in a 45.9% annual rate pace over three months. Belgium shows an export decline over 12 months that gives way to increases over three months and six months but again without a clear trend.

The trends for the three-month growth rates are positive for the EMU aggregates and for the exports of Finland, Portugal, and Belgium. But trends are negative for exports as well as imports for Germany France and the U.K. Over 12 months, most of the calculations show declines in trade flows, underpinning again the notion that manufacturing has been weak in Europe. That weakness lends itself to weakness in both the exports and imports; European weakness in manufacturing naturally leads to knock-on weakness in trade. That is not surprising. It has been the strength in the services sector that has tended to keep growth alive, especially in Europe.